Can Relationship Based Pricing Deliver Growth?

While new members are desirable, a renewed focus on existing members may stimulate much needed growth in the credit union industry.

 
 

Although credit unions continue to enjoy robust loan growth (10.7 percent), the industry has been experiencing lackluster growth in two key areas: members and shares. As of December, 2005, member growth remained flat at 1.5 percent and share growth reached a ten year low of just 3.8 percent.

To reverse the trend, many credit unions have turned to community charters on the assumption that increasing the size of the potential member universe will lead to growth. While many credit unions have “gone community” successfully, the industry as a whole has not realized the much-anticipated growth. As the graph below illustrates, although the potential member base has increased markedly, actual member growth has remained stagnant.*

New versus Existing Members?

Community charters are implicitly a strategy to woo new members into the credit union fold. According to various marketing experts, however, it can cost an institution 4 to 15 times more to acquire a new customer than to retain an existing customer. Given such high member acquisition costs and the lack of strong member growth from the industry’s efforts to date, credit unions may want to reevaluate whether their existing member base can serve as a more reliable source of growth.

Relationship Based Pricing

Customer loyalty programs are an effective way to retain existing members by rewarding them for their continued business. Among credit unions, a popular strategy to reward loyal members is to develop effective Relationship Based Pricing (RBP) strategies.

As its name suggests, relationship based pricing seeks to offer better rates and services to members who maintain deep, profitable relationships with the credit union. According to Forrester Research, loyalty programs like RBP are “about increasing future product purchases from existing customers—not simply keeping accounts open.”

The operative phrase is “increasing future product purchases.” Effective RBP strategies define loyalty not in terms of the member’s tenure with the institution or how many accounts the member has with the credit union. Rather, well-designed RBP strategies define loyalty based on the financial contribution the member makes to the credit union. The RBP model is structured to reward profitable members and incent them to continue doing business with the credit union.

Credit unions can structure their RBP programs in a variety of ways. Some tie their rewards to account balances. Others provide rewards as a way to encourage a particular type of behavior—i.e. utilization of self-service channels. In the coming weeks, we will highlight several effective credit union RBP strategies in subsequent articles and in our webinar, Relationship Based Pricing: Giving More to Get More, brought to you by Callahan & Associates.

* Potential membership data is from the 5300 Call Report (Account Code 084). Given that the US population is roughly 300 million, it is clear that there is significant double-counting when aggregating the potential membership data. The graph is nonetheless illustrative in highlighting the disparity.

 

 

 

May 15, 2006


Comments

 
 
 
  • Dear Annie, Our CU has had 15,000 members but in the last four years we identified members with balances below $50 or zero balances and basically let them go. First we sent letters to them encouraging them to become active again but many moved out of the area or did not find a need to work with us {unfortunately} and just never got around to cancel their membership. We now are closer to 13,000 more active members. This may explain one of the reasons membership hase not grown while our assets have remained stable. We have since increased our advertising in the press and on billboards as well as community activity to increase our visibility. We want to grow and with new management are actively working on this through more loan options. This is more important at the moment than getting additional members although we are pursuing this too and have changed to a community charter. Keep in mind we had around 160 SEG's so this was a quasi community CU already. So far community charter has not brought us as many new members as we wish. This confirms your findings. Any ideas how to get more people interested in us? Please do not use my name or credit union in any of your publications or conversations. Thank you. Matt Pfaendler Director, Heritage Valley FCU York, PA
    Anonymous